Tony Alexander September 2022

Turning of the housing cycle

House prices on average around the country have been falling since December last year with the average fall so far adding up to 10.8%. In Auckland prices have fallen about 16%, Wellington 15%, and Canterbury 4%. It is highly likely that as we go through spring into summer prices will fall further. But the cards are starting to fall into place for this period of price decline to end.

If we look for instance at my monthly survey of real estate agents, we find that 70% say buyers are highly concerned about high interest rates. A year ago, that was just 42%. But the latest reading is down from 82% in July, possibly in response to banks cutting their fixed lending rates by between 0.2% and 0.4% since June.

Discussion is growing about the Reserve Bank being able to cut interest rates late next year and that discussion is likely to intensify when the next set of inflation numbers appear in the middle of October. They will show inflation falling from the current 7.3% but still staying at a high level.

My survey of real estate agents also shows that 67% observe that buyers are very concerned about getting access to finance. A year ago, this reading was 44% and it is down from a peak of 89% in January. The July reading was 78%. Access to finance is worse than normal but improving with a net 25% of mortgage advisers in my monthly survey of themselves saying that they see banks as becoming more willing to advance finance to home buyers.

Then there is the third main thing which buyers are concerned about – falling prices. 66% of real estate agents say that buyers are displaying FOOP – fear of over-paying. A year ago, this reading was only 23% but the latest result is down from a peak of 73% in May. There remain high worries about buying before the bottom in prices is reached and that is where young buyers in particular need a bit of perspective.

New home buyers need to ask themselves what is most important. Is it gaining the last 5% of the fall in prices? Or is it taking advantage of a 107% rise in property listings from a year earlier, and vendors becoming more willing to deal, in order to secure a home in which to raise a family over the next 10-30 years?

The answer of course is the second option and perhaps this is starting to show through. In my monthly survey of mortgage advisers, a net 8% have recently reported that they are seeing more first home buyers in the market. This is the first positive result since August last year and the strongest result since February 2021. At its worst, in December 2021 a net 75% of mortgage advisers were seeing fewer first home buyers looking for assistance.

This result has just been replicated in my survey of real estate agents. A net 6% have just reported seeing more first home buyers. This is the first positive result since September last year. Also, for the first time since February last year more agents are seeing extra numbers of people at open homes than are seeing fewer.

The residential real estate market is still weak and prices are still falling. But the key factors are now in place to allow me to describe the endgame as being underway for this period of price decline.

Another one of those key factors is the high net 31% of people in the recently released ASB survey of housing intentions saying that they expect prices to fall.

This survey captures changes in expectations which tend to happen after actual price changes. So, we cannot use it to project where things are headed. But the latest result is very important because it suggests vendors are now capitulating to the reality of a much weaker market. They have given up hopes of selling for what they could have got late last year.

Their capitulation means turnover is likely to improve soon, prices ease a but more, and more properties will be brought forward for sale. The onset of spring will enhance that rise in listings. But with many buyers still looking to make a purchase because they want a house and expect to keep their job, at some stage perhaps before the end of the year the stock of listings may start falling again.

When that happens, we will see mild upward pressure on prices return, keeping in mind that it was the fall in stocks to record lows late last year which saw prices surge 11% on average from July to November 2021 despite rising interest rates and tightening credit availability.

So far, I have not discussed investors. For them the measures are all far more negative than for first home buyers because of the tax changes from March 27 last year. But the degree to which real estate agents and mortgage advisers see them removed from the market is easing. More investors are showing interest in making a purchase, and many are keeping an eye on the political opinion polls.

The National Party have promised to restore interest rate deductibility when re-elected and take the brightline test back to two years. If their election win looks like it will occur next year, then we can expect investors to be quite active in the housing market through 2023.

For now, house sales and prices are falling and stock levels are rising. But housing markets move in cycles and key measures have changed enough for me to conclude that we are approaching the end of the downward leg in the cycle. Price gains of 5% - 10% on average are possible through 2023 as the many buyers with jobs currently standing back in the shadows step forward once more.

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By Tony Alexander

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